Court of Appeal backs challenge led by Leaseholder Action’s Liam Spender in major service charge ruling

The costs of the rented entryphone system were £590,000 between 2018-20 of which £480,000 related to intercom and door entry systems. The leaseholders paid many millions for these systems from July 2000 despite never owning them. Their payments in 2018-20 amounted to 1.5 times the cost of buying and installing a new system. Nevertheless, the landlords continued with the same supplier with a discount of 50% from 2022. In the years since then leaseholders have again paid costs greater than that for buying and installing a new system.

On 5 December, the Court of Appeal confirmed that freeholders cannot rely on the mere existence of a long-term contract as proof that service charges are reasonable. It held that leaseholders are entitled to challenge such costs, and where they raise a credible basis for doing so - including by showing charges far out of line with market norms - the freeholder must justify the contract and the price agreed at the outset. Because this had not been properly examined, the case will now be sent back to the First-tier Tribunal to be reconsidered under the correct legal approach.

The Court of Appeal also found that the Upper Tribunal had applied a legal test that neither side had argued and had reached conclusions the leaseholders had no fair opportunity to address. Although the Court agreed in principle with the legal test adopted by the Upper Tribunal, it held that it had been applied incorrectly and without considering evidence that supported the leaseholders’ case. As a result, the decision could not stand.

This is a rare example of proceedings being remitted from the Court of Appeal back to the First-tier Tribunal. It is also the first time the Court of Appeal has considered how the statutory test for reasonableness of residential service charges applies in relation to costs arising under the long-term and often onerous agreements entered into by people buying and living in leasehold flats.

The ruling adds renewed momentum to the Leaseholder Action claim. Freeholders and managing agents must be able to justify what they charge and they cannot rely on opaque or outdated arrangements without proper explanation. This same question of transparency lies at the core of Leaseholder Action, which challenges secret buildings insurance commissions that have increased premiums paid by unwitting leaseholders. In some cases the secret commissions increase these premiums by up to sixty per cent. Thousands of homeowners have now joined the claim, which is brought by Mr Spender’s firm Velitor Law and is funded by Balance Legal Capital.

Commenting on the Court of Appeal’s decision, Mr Spender - who acted as both appellant and solicitor - said:

“The plight of leaseholders in England and Wales is a national scandal. Part of that is because service charges have been shrouded in mystery for far too long, and leaseholders have had little way to challenge them. Many find themselves trapped in poor value and opaque contracts arranged by freeholders and managing agents. This judgment shows that the tide is turning. Charges can be examined, and freeholders can – and must – be held to account, however long it takes.

“I am a real estate lawyer; I understand the law and I deal with these issues every day. Most leaseholders are not in that position. That is why group claims like Leaseholder Action matter. They give leaseholders a route to question costs that they could not realistically challenge on their own.

“No one should have to accept charges that cannot be justified. Leaseholders deserve clarity, fairness and accountability. This judgment is another step towards achieving that.”